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EXECUTIVE SUMMARYIn general terms, a PER is a study that looks for improving public investment efficiency. Throughout PER work, we aim setting up new motivations in all national actors involved in public investment. We are conscious that the outcomes of this review are just the starting point of a new process that will become regular practice into our customs. —Minister of Finance Mourad Medelci, Opening words at the PER seminar held in Algiers, July 2006 Algeria is a large exporter of hydrocarbons, with about two-thirds of its receipts accruing to the budget. Algeria has the eighth largest proven gas reserves in the world. Oil prices, at US$20 per barrel in 2000, surpassed US$40 in 2004 and then US$50 in 2005. With prices staying high, growth averaged about 5 percent. Inflation remained below 3 percent. The country is experiencing record-high current account balances and international reserves. As a result of the oil windfall, the fiscal stance has improved. The central government budget balance went from an overall deficit of 2 percent of GDP in 1999 to a surplus of 14 percent in 2005. Budget revenues increased from 30 percent of GDP in 1999 to 41 percent in 2005. At the same time, expenditures declined, from 31 percent of GDP in 1999 to 27 percent in 2005. Authorities have made use of the enlarged fiscal space to make advanced payments on external debt and to finance a massive public investment program (known as PCSC1) to expand public services and to deal with a backlog of infrastructure rehabilitation. Thanks to advanced repayments, Algeria is now a net creditor nation to the rest of the world, with an external debt-to-GDP ratio calculated at 17 percent in 2005, compared with a high of 80 percent of GDP in 1994. With the incorporation of its predecessor pipeline (PSRE2) and inclusion of new programs, the initial PCSC allocation has grown to roughly US$114 billion projected for 2005–09. This represents above 115 percent of 2005 GDP. Algeria’s public investment ratio is above 10 percent of GDP and will keep high in the next three years. This level is among the highest in the world, dramatic especially when compared with the average of less than 4 percent of GDP in OECD countries, less than 5 percent of GDP in Latin America, and less than 8 percent of GDP in Asian countries. The PCSC can contribute to consolidate and improve key social outcomes. Algeria has achieved significant successes in universalizing primary education and increasing access to other levels of education. Geographic access to health facilities is at 98 percent, and the entire population has financial coverage for at least public-sector health-care services. Indeed, with the exception of maternal mortality, all Millennium Development Goals (MDGs) are likely to be met by 2015. Yet, Algeria is now at a crossroads. As the massive PCSC unfolds, the country faces a fundamental challenge: Will the moment of opportunity be harnessed to sustain long-term economic and employment growth and continuous social development,—or will it be squandered through inefficiency, waste, and corruption? Per the Government’s request, and following an intensive dialogue with the Authorities during multiple missions, the objectives of this PER are to assist the government in the following:
This report is not a traditional PER. On the one hand, the sectoral chapters cover multiple topics that go well beyond the basic review of public expenditure patterns, thus enriching the analysis. On the other hand, the presence of important data shortcomings, in terms of data quality and availability, limits its traditional coverage. Thus, it does not deal with the distributional impact of public spending, the role of civil service in the efficiency of public services, and the evaluation of strategic options for the use of hydrocarbon resources. The World Bank was unable to obtain the 2000 household survey database that would have allowed it to make incidence analysis on the distributional impact of public spending. So, findings concerning the equity impact of the PCSC are few (albeit provocative) and they are contained in the sectoral chapters of the report. On civil service, data are particularly scarce, requiring a dedicated effort beyond the scope of this exercise. Finally, although alternative uses of hydrocarbon revenues are mentioned in the sections devoted fiscal sustainability, the PER strictly limits itself to the overall objectives agreed with the Algerian authorities. A. Key Messages Algeria has applied a prudent budget formulation, while managing its exceptional oil resources well. Despite high oil prices, the Government has adhered to a conservative practice: The budget reference oil price has been of US$19 per barrel, although average oil prices were in fact above US$45 per barrel in 2004 and 2005. Excess oil revenues are feeding the hydrocarbon stabilization fund—the Fond des Régulation des Recettes (FRR). Sound management of hydrocarbon revenues has also been strengthened by setting rules that prevent the FFR from financing the nonhydrocarbon budget deficit directly. Despite its success in building reserves, the budget reference oil price should be revised toward more realistic levels and the FRR is reaching a limit in its financing capacity of advanced debt repayment and should be converted into a savings and financing account fully integrated into the budget.3 As currently budgeted, full execution of the PCSC is fiscally sustainable in the medium term and its expected inflationary impact is low. Under the assumption that Algeria continues prudent monetary and debt management policies, and even under the extreme assumption that oil prices return to their reference level of US$19 per barrel, Algeria could implement the PCSC while maintaining a sustainable fiscal framework. That is because the exceptional hydrocarbon revenues of recent years have enlarged the fiscal space for public investment. Yet in the forthcoming period of budgetary expansion, it is crucial that Algeria hold firm with a prudent fiscal stance. The current record-high oil prices could return to lower levels. And to avoid serious medium-term fiscal risks, Algeria also needs to optimize permanent increases in current expenditure derived from PCSC investments. The massive volume of public investment has the potential to produce a major macroeconomic and social impact in the near future. The magnitude will be particularly high for 2006–09 for three reasons. First, an extraordinarily high rate of investment has now been approved for the PCSC. Second, abundant resources from the predecessor program (the PSRE) and new programs have been merged into the original PCSC. Third, substantial resources have been transferred to the regions (wilayas) since PSRE implementation, with these deconcentrated entities showing higher execution ratios than some centralized entities, but having dramatic problems in their capacity to monitor and control outlays. However, given the high albeit declining unemployment rate in Algeria, concerns of significant inflationary impacts from investment expansion are not justified. Large front loaded budget authorizations (preceding appropriations) also increase the risk of forced acceleration in the execution of some large-scale projects. Political pressure to speed execution is real in line ministries. Yet non-adherence to minimum standards—in cost-benefit analysis, social returns, and project profiles—could have severe consequences in wasted resources, duplication of activities, and procurement failures. Large front loaded budget authorizations (preceding appropriations) also increase the risk of forced acceleration in the execution of some large-scale projects. Political pressure to speed execution is real in line ministries. Yet non-adherence to minimum standards—in cost-benefit analysis, social returns, and project profiles—could have severe consequences in wasted resources, duplication of activities, and procurement failures. Projections of investment execution ratios show that frontloaded budget authorizations will provide little help in expanding actual absorptive capacity abruptly and, at best, produce a moderate rising trend in overall project execution capacity over the next three years. Three complementary Bank estimates of the projected ratios of investment execution/authorization (two “bottom-up” and one “top-down” estimate) converge at an average of approximately 70 percent for 2005–07. This is above the 65 percent average during 2003–04. While a moderate positive trend is both normal and desirable, the authorities need to refrain from the temptation to over-commit appropriated budget resources. P 
CSC execution rates in 2005 confirm small improvements in overall project execution capacity, and mixed outcomes per sector. Two complementary investment execution ratios are considered, one with respect to budget authorizations and another with respect to payment credits (budget appropriations). While the former ratio reflects absorption capacity with respect to announced, still non allocated resources; the latter reflects absorption capacity with respect to allocated resources in the annual budget law.
Therefore, this PER calls, at the macro level, for gradual implementation of the PCSC in order to match moderate improvements in institutional absorption capacity, and ultimately achieve PCSC goals. This implies a slowdown in the amount of budgetary authorizations (autorisations de programme) and appropriations (credits de paiement) allocated to resource-swamped entities from 2007 onward. For their part, Authorities seem to have implemented diverse measures. On the budget authorizations side, the full envelope has been committed. Indeed, at the outset of PER work in October 2005, the Bank was informed that approximately three-fourths of the total initial amount for the PCSC had already been authorized, and that this information had been transmitted to the sectoral ministries and wilayas. The remaining 25 percent was authorized and communicated in early 2006. On the budget appropriations side, however, payment credits allocated to the PCSC in the 2006 supplementary and 2007 initial budget laws are exactly the same amount, thus implicitly recognizing a ceiling implementation capacity. Finally, measures taken during Government-Walis meetings in June 25th 2006 and December 9th 2006 concerning local investment should contribute to make procurement procedures more flexible and to accelerate the rates of project execution. In any case, there is no doubt that abundant resources have contributed to bigger investment envelopes in key implementing ministries, in some cases multiplying several times. In addition, implementation of such a big public investment program entails major challenges at the project level. There are justified concerns that substantial resources may be misallocated and wasted, instead of fueling growth. As past Bank analysis of the PSRE revealed, Algeria’s public investment system has several shortcomings. First, project costs are high. Second, the technical preparation of implementation staff and the quality of projects is generally weak and uneven, with projects bearing little relationship to strategic sectoral objectives. Third, many weaknesses originate from the urgency that accompanies project preparation at this scale—not least, the myriad of specific demands that projects are supposed to address and the overlapping responsibilities among multiple authorities and participating parties (25 ministerial commissions and 48 wilaya commissions in the case of PSRE). Thus, institutional and governance issues are central in limiting success. Therefore, at the micro level, analytical and policy efforts must mainly be focused on the central issues of the efficiency and cost-benefit of government investment. In this direction, this report also suggests Algeria must pay close attention to the sectoral consistency and quality of projects selected under the PCSC. There is not only a need for a longer timeframe for programs and projects implementation, but for a gradual improvement in project preparation and execution capacity. This PER recommends working on three institutional reform pillars. Success of the PCSC will ultimately depend on an equally ambitious effort to reform the institutional framework for public investment (see section B below for complete details). These three pillars are:
In addition, severe shortcomings affecting the quality of sectoral investment must be addressed. Outcomes in the four sectors analyzed in this PER, transport and public works, water, education, and health, have all progressed, yet public investment in these sectors must address similar problems. While coverage of roads and social services has generally been extended, problems remain across sectors—uneven coverage in rural areas; low efficiency and quality of services; virtually no maintenance; absence of updated and comprehensive sectoral strategies (with the exception of education and more recently health); incomplete regulatory frameworks (with the exceptions of education and water); and highly fragmented (especially in health and water) or weak (especially in education and transport) institutional frameworks. Finally, public–private partnership (PPPs) are proving to be particularly useful for managing investment and operating expenditures in infrastructure projects. Various PPP models are possible; and several are already being applied in practice in the water sector (for example, “build-operate-transfer” [BOT] and management contracts) and in the transport sector (for example, an airport management contract and a BOT concession for ports). However, a common regulatory framework is missing, coordination is seriously lacking among the oversight ministries, the risk of possibly incompatible models is real, the human resources to provide assessment capacity is very limited across ministries, and the essential monitoring capacity is weak. This PER recommends that opportunities for (PPPs) and other forms of private participation should be cautiously considered when appraising investment projects. Projects implemented under PPP agreements should be consistent with the sectoral strategy and the medium-term plans; and the fiscal and governance risks of PPP agreements should be very carefully considered. In addition, these projects should not be programmed separately from other public investment projects. And, as private financing of infrastructure tends to be more expensive than direct public borrowing, PPPs should be justified when the efficiency gains derived from private involvement outweight the higher financing costs. Given the technical complexities of PPPs, Algeria may want to start with PPPs for projects that pose only limited fiscal risks, while improving the capacity to evaluate, select and monitor public investment projects. It is finally important to have in place a proper legal framework to ensure adequate risk transfer to the private partner, and the risk management tools to measure and disclose fiscal costs related to PPPs. B. Setting High Standards for Public Investment Management The efficiency of public investment Public investment expenditure in Algeria is substantial—about 10 percent of GDP average over 2000–04, compared with about 7.5 percent in neighbouring countries. A significant increase of public investment is projected for the five years of PCSC implementation. As a ratio to non-hydrocarbon GDP, if all resources authorized to the PCSC were executed, nonhydrocarbon public investment would almost double from 16.5 percent in 2004 to a peak of over 30 percent in 2007, then decreasing to 16 percent in 2009. However, most likely their execution would be greatly hindered by the present absorption capacity constraints. Implication for reform: Institutional bottlenecks are the key issues that need to be addressed. The impact of public investment on the economy depends on its efficiency, i.e. its capacity to produce a unit of output using the lowest combination of inputs. From a Keynesian perspective, any increase in aggregate demand—whether from consumption, exports, or investment—can elicit an increase in actual GDP, which will continue so long as investment keeps expanding. However, whereas all investment positively affects potential GDP, its impact as a source of real growth depends on its efficiency. In addition, quality also requires cost-benefit analysis that allow to optimize the use of resources. Therefore, concern is justified that substantial investment resources could be misallocated and wasted rather than channelled to sustainable growth. Implication for reform: Attention must be focused on the efficiency of public investment. And, for its part, cost-benefit analysis at the project level examined in the context of sectoral investment. Evidence shows that public investment efficiency in Algeria has been relatively lower than its neighbours in recent years, though at least not deteriorating. There is no empirical evidence to suggest that the investment expansion after 1999 has led to greater overall inefficiency. To the contrary, the incremental capital-output ratio (ICOR) that measures efficiency declined somewhat relative to the 1990s. This suggests an improvement (i.e. a lower ICOR means increased efficiency). It mainly resulted from a safer security environment and the halting of several wasteful dam projects. In the water, railways and airport sectors, however, resources have been misallocated in oversized investment projects. Over-investment adds pressure to current expenditures as well as reduces financing to maintain capital assets. Implication for reform: Large projects, especially in water, railways and airport sectors, should be well appraised, monitored and evaluated by CNED. The overall record of budget public investment execution has generally been acceptable for many years in Algeria. In the late 1990s, actual investment expenditure was close to that which was budgeted. However, there was substantial intersectoral variation (tourism and telecom showed the lowest execution rates, with other sectors spending more than their original budget). The average investment execution rate reached 107 percent in 1998–2001. Then, this rate slowed down to 92 percent in 2002–04. Under the significant expansion of resources programmed for 2005-07, the average investment execution rate is likely to further decline to less than 90 percent. For instance, in 2005, such overall rate was 74 percent. The implementation capacity of approved investment cannot keep pace with the pace of available resources. Attempts to execute beyond reasonable absorption capacity will only result in more waste of resources, as has been demonstrated in the past by the severe execution problems of large projects. Implications for reform: The government should definitely stretch the implementation time of the investment program (the budgetary appropriations – credits de payment (CPs)), and set a more realistic timeframe. At the same time, concrete measures should be taken to improve investment programming and execution (maîtrise d’ouvrage) capacity. Pillar 1. The restructuring of the national public investment system Taking stock of experience with past public investments is a necessary pre-requirement for sound execution of the future public investments. A thorough review of the present project pipeline, moving from low- to high-performing projects within the same ministry is a necessary first step. Implication for reform: A first priority is an annual review should be undertaken of the accumulated stock of large capital assets and of the major projects under implementation, resulting in appropriate reallocations from under-performing to better performing projects, while improving project execution. Second, the key challenges of the restructuring of the national public investment system, in sequential order, are improvements in: sectoral strategies, project preparation, execution, monitoring and evaluation. Hence, sound, agreed-upon, and up-to-date sector strategies should be in place. In most sectors, these strategies have not been reviewed systematically in Algeria for some time. Implication for reform: Each ministry should review its sectoral strategie and confirm it, or propose a time bound work program to formulate, complete, or update it, in consultation with the Ministry of Finance. Yüklə 2,19 Mb. Dostları ilə paylaş:
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